Exa (EXA) 10-Q 2014 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2014

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-35584

EXA CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Delaware	04-3139906
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

55 Network Drive

Burlington, MA 01803

(Address of Principal Executive Offices, Including Zip Code)

(781) 564-0200

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of August 25, 2014, 13,805,428 shares of the registrant’s outstanding common stock, $0.001 par value per share, were outstanding.

EXA CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED JULY 31, 2014

TABLE OF CONTENTS

	Pages
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited) as of July 31, 2014 and January 31, 2014		3
Consolidated Statements of Operations and Comprehensive Loss (Unaudited) for the three and six months ended July 31, 2014 and 2013		4
Consolidated Statements of Cash Flows (Unaudited) for the six months ended July 31, 2014 and 2013		5
Notes to Consolidated Financial Statements (Unaudited)		6
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		25
ITEM 4. CONTROLS AND PROCEDURES		26
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS		26
ITEM 1A. RISK FACTORS		27
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		27
ITEM 6. EXHIBITS		28
SIGNATURES		29

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EXA CORPORATION

Consolidated Balance Sheets

(Unaudited)

(in thousands, except share and per share data)

	July 31, 2014			January 31, 2014
ASSETS
Current assets:
Cash and cash equivalents	$	31,968		$	28,753	��
Accounts receivable		7,865			27,245
Prepaid expenses and other current assets		2,744			4,321
Total current assets		42,577			60,319
Property and equipment, net		8,279			7,356
Intangible assets, net		2,570			2,745
Deferred tax assets		42			13,306
Other assets		1,158			1,123
Total assets	$	54,626		$	84,849
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,865		$	1,684
Accrued expenses		6,102			10,285
Current portion of deferred revenue		21,457			30,594
Current maturities of capital lease obligations		2,762			2,426
Total current liabilities		32,186			44,989
Deferred revenue		12			273
Capital lease obligations		2,701			2,695
Other long-term liabilities		530			528
Deferred rent		641			831
Total liabilities		36,070			49,316
Commitments and contingencies (Note 9)
Stockholders’ equity :
Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding		—			—
Common stock, $0.001 par value; 30,000,000 shares authorized; 13,837,162 and 13,388,712 shares issued, respectively; 13,804,660 and 13,356,210 shares outstanding, respectively		14			13
Additional paid-in capital		86,486			85,201
Accumulated deficit		(67,950	)		(49,721	)
Treasury stock (32,502 common shares, at cost)		—			—
Accumulated other comprehensive income		6			40
Total stockholders’ equity		18,556			35,533
Total liabilities and stockholders’ equity	$	54,626		$	84,849

The accompanying notes are an integral part of the consolidated financial statements

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EXA CORPORATION

Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(in thousands, except share and per share data)

	Three Months Ended July 31,						Six Months Ended July 31,
	2014			2013			2014			2013
Revenue:
License revenue	$	12,316		$	10,719		$	23,976		$	21,411
Project revenue		2,527			1,985			4,637			3,781
Total revenues		14,843			12,704			28,613			25,192
Operating expenses:
Cost of revenues		4,632			3,833			9,228			7,504
Sales and marketing		2,509			2,179			5,076			4,296
Research and development		5,404			4,450			10,506			8,836
General and administrative		3,217			2,426			6,339			5,197
Total operating expenses		15,762			12,888			31,149			25,833
Loss from operations		(919	)		(184	)		(2,536	)		(641	)
Other income (expense), net:
Foreign exchange gain (loss)		175			(93	)		131			(56	)
Interest expense		(94	)		(176	)		(177	)		(557	)
Interest income		2			5			6			9
Loss on extinguishment of debt		—			(755	)		—			(755	)
Other income, net		3			3			3			5
Total other income (expense), net		86			(1,016	)		(37	)		(1,354	)
Loss before income taxes		(833	)		(1,200	)		(2,573	)		(1,995	)
(Provision) benefit for income taxes		(176	)		402			(15,656	)		656
Net loss	$	(1,009	)	$	(798	)	$	(18,229	)	$	(1,339	)
Net loss per share:
Basic	$	(0.07	)	$	(0.06	)	$	(1.34	)	$	(0.10	)
Diluted	$	(0.07	)	$	(0.06	)	$	(1.34	)	$	(0.10	)
Weighted average shares outstanding used in computing net loss per share:
Basic		13,775,250			13,318,443			13,639,866			13,307,456
Diluted		13,775,250			13,318,443			13,639,866			13,307,456
Comprehensive loss:
Net loss	$	(1,009	)	$	(798	)	$	(18,229	)	$	(1,339	)
Foreign currency translation adjustments		(75	)		14			(34	)		12
Comprehensive loss	$	(1,084	)	$	(784	)	$	(18,263	)	$	(1,327	)

The accompanying notes are an integral part of the consolidated financial statements

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EXA CORPORATION

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

	Six Months Ended July 31,
	2014			2013
Cash flows provided by operating activities:
Net loss	$	(18,229	)	$	(1,339	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		1,394			1,039
Stock-based compensation expense		870			496
Deferred rent expense		(187	)		(283	)
Non-cash interest		—			162
Loss on extinguishment of debt, non-cash portion		—			465
Deferred income taxes		15,215			(1,258	)
Net change in operating assets and liabilities:
Accounts receivable		19,403			22,978
Prepaid expenses and other current assets		(374	)		280
Other assets		(35	)		(53	)
Accounts payable		181			(769	)
Accrued expenses		(4,058	)		(2,151	)
Other liabilities		2			51
Deferred revenue		(9,387	)		(8,169	)
Net cash provided by operating activities		4,795			11,449
Cash flows used in investing activities:
Purchases of property and equipment		(577	)		(598	)
Net cash used in investing activities		(577	)		(598	)
Cash flows used in financing activities:
Proceeds from stock option exercises		416			135
Payments of long-term debt		—			(7,365	)
Payments of capital lease obligations		(1,358	)		(1,025	)
Payment of debt issuance costs		—			(213	)
Net cash used in financing activities		(942	)		(8,468	)
Effect of exchange rate changes on cash		(61	)		(141	)
Net increase in cash and cash equivalents		3,215			2,242
Cash and cash equivalents, beginning of period		28,753			30,716
Cash and cash equivalents, end of period	$	31,968		$	32,958
Supplemental cash flow disclosures:
Cash paid for interest	$	177		$	462
Cash paid for income taxes	$	1,149		$	266
Supplemental disclosure of non-cash investing and financing activities:
Acquisition of equipment through capital leases	$	1,700		$	43

The accompanying notes are an integral part of the consolidated financial statements

5

EXA CORPORATION

Notes to Consolidated Financial Statements (Unaudited)

(Dollars in thousands except per share amounts)

1. Description of Business

Exa Corporation (the “Company” or “Exa”), a Delaware corporation, develops, sells and supports simulation software and services that vehicle manufacturers use to enhance the performance of their products, reduce product development costs and improve the efficiency of their design and engineering processes. The Company’s solutions enable engineers and designers to augment or replace conventional methods of evaluating designs that rely on expensive and inefficient physical prototypes and test facilities with accurate digital simulations that are more useful, cost effective and timely. The Company’s simulation solutions enable customers to gain crucial insights about design performance early in the design cycle, reducing the likelihood of expensive redesigns and late-stage engineering changes, which result in cost savings and fundamental improvements in the development process. The Company is primarily focused on the ground transportation market, but is also beginning to explore the application of its capabilities in the aerospace, oil and gas production, chemical processing, architecture, engineering and construction, power generation, biomedical and electronics industries.

Exa has offices and sells directly in the United States and through subsidiaries in France, Germany, Italy, Japan, Korea, China, and the United Kingdom. The Company also conducts business in Sweden, India, Brazil, Russia, Canada, Finland, Spain and Australia.

2. Summary of Significant Accounting Policies

Applicable Accounting Guidance

Any reference in these notes to applicable accounting guidance is meant to refer to the authoritative nongovernmental United States generally accepted accounting principles (“GAAP”) as found in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”).

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with GAAP for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended January 31, 2014 included in the Company’s Annual Report on Form 10-K. These financial statements reflect all adjustments (consisting solely of normal, recurring adjustments) that are, in the opinion of management, necessary for a fair statement of results for the interim periods presented.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Although the Company regularly assesses these estimates, actual results could differ materially from these estimates. Changes in estimates are recorded in the period in which they become known.

The Company bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. Actual results could differ from management’s estimates if future events differ substantially from past experience, or other assumptions, while reasonable when made, do not turn out to be substantially accurate.

Internal Use Software

Costs incurred in the research and development of the Company’s software products are expensed as incurred. Costs incurred during the application development stage of internal-use software projects, such as those used to develop internal systems, are capitalized. Capitalized costs include external consulting fees and payroll and payroll-related costs for employees in the Company’s development and information technology groups who are directly associated with, and who devote time to, the Company’s internal-use software projects during the application development stage. Capitalization begins when the planning stage is complete and the Company commits resources to the software project. Amortization of the asset commences when the software is complete and placed in service. The Company amortizes completed internal-use software over the estimated useful life. Costs incurred during the planning, training and post-implementation stages of the software development life-cycle are expensed as incurred. Costs related to upgrades and enhancements of existing internal-use software that increase the functionality of the software are also capitalized.

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Recent Accounting Pronouncements

In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (ASU 2013-11). ASU 2013-11 clarifies guidance and eliminates diversity in practice on the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. This new guidance was effective for the Company in the first quarter of fiscal year 2015. The Company adopted ASU 2013-11 on February 1, 2014. This adoption did not have a material impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP. The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). The Company is currently evaluating the impact of its pending adoption of ASU 2014-09 on its consolidated financial statements and has not yet determined the method by which it will adopt the standard in fiscal year 2018.

3. Computation of Net Loss Per Share

Net loss per share has been computed using the weighted average number of shares of common stock outstanding during each period. Diluted amounts per share include the impact of the Company’s outstanding potential common shares, such as shares issuable upon exercise of in-the-money stock options or warrants, when dilutive. Potential common shares that are anti-dilutive are excluded from the calculation of diluted net loss per common share.

The following summarizes the calculation of basic and diluted net loss per share:

	Three Months Ended July 31,						Six Months Ended July 31,
	2014			2013			2014			2013
Numerator:
Net loss	$	(1,009	)	$	(798	)	$	(18,229	)	$	(1,339	)
Denominator:
Weighted average common shares, basic and diluted		13,775,250			13,318,443			13,639,866			13,307,456
Basic and diluted net loss per share	$	(0.07	)	$	(0.06	)	$	(1.34	)	$	(0.10	)

All of the Company’s outstanding stock options, unvested restricted stock units and warrants were anti-dilutive for the three and six months ended July 31, 2014 and 2013 due to the net loss positions of the Company. At July 31, 2014 and 2013, the Company had stock options outstanding to purchase 2,712,985 and 2,273,331 shares of its common stock, respectively. At July 31, 2014, the Company had 19,521 shares of unvested restricted stock units outstanding and none outstanding as of July 31, 2013. At July 31, 2014 and 2013, the Company had warrants outstanding to purchase 21,538 shares of its common stock.

7

4. Property and Equipment, net

Property and equipment, net consists of the following as of July 31, 2014 and January 31, 2014:

	July 31, 2014			January 31, 2014
Computer software and equipment	$	20,751		$	18,635
Office equipment and furniture		458			444
Leasehold improvements		2,626			2,627
Total property and equipment		23,835			21,706
Less: accumulated depreciation		(15,556	)		(14,350	)
Property and equipment, net	$	8,279		$	7,356

For the three and six months ended July 31, 2014, depreciation expense was $643 and $1,219, respectively. For the three and six months ended July 31, 2013, depreciation expense was $456 and $864, respectively. Included in computer software and equipment and office equipment and furniture is equipment held pursuant to capital leases with costs of $18,409 and $16,802 and accumulated amortization of $11,858 and $10,997 as of July 31, 2014 and January 31, 2014, respectively.

During the three months ended July 31, 2014, the Company capitalized $0.1 million of hardware, software, external consulting fees and payroll and payroll-related costs for the development and implementation of internal-use software applications. The Company implemented the software during the second quarter of fiscal year 2015 to be used primarily for accounting and reporting applications. Included in computer software and equipment is capitalized internal use software costs of $0.1 million and accumulated amortization of less than $0.1 million at July 31, 2014.

5. Accrued Expenses

Accrued expenses consist of the following:

	July 31, 2014		January 31, 2014
Accrued payroll	$	1,966	$	1,603
Sales and withholding taxes		585		3,158
Accrued commissions and bonuses		900		2,456
Accrued income taxes payable		632		571
Deferred rent, current portion		605		602
Legal and professional		600		489
Other accrued expenses		814		1,406
Total accrued expenses	$	6,102	$	10,285

6. Deferred Rent

In connection with its corporate headquarters lease entered into in July 2008, the Company received a tenant improvement allowance of $1,958 from the landlord. This lease incentive was recorded as leasehold improvements and deferred rent and is being amortized as part of rent expense on a straight-line basis over the life of the lease. The Company’s subsidiary Euroxa S.a.r.l. entered into a new office lease in Paris, France in May 2012 with a landlord incentive totaling $148, equivalent to four months free rent, which is also being amortized as rent expense on a straight line basis over the life of the lease. In addition, the Company’s facility leases typically contain other than straight-line payment features. The difference between the straight-line rent expense of the lease and the cash payments is recorded as deferred rent. Deferred rent at July 31, 2014 and January 31, 2014 is as follows:

	July 31, 2014			January 31, 2014
Leasehold improvement incentive	$	440		$	572
Non-cash rent expense		806			861
Total deferred rent		1,246			1,433
Less: current portion included in accrued expenses		(605	)		(602	)
Deferred rent, net of current portion	$	641		$	831

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7. Fair Value Measurements

Financial instruments consist primarily of cash and cash equivalents, accounts receivable and capital lease obligations. As of July 31, 2014 and January 31, 2014, the carrying amounts of these instruments approximate their fair values. The estimated fair values have been determined from information obtained from market sources and management estimates.

In determining the fair value of its financial assets and liabilities, the Company uses various valuation approaches. ASC 820,Fair Value Measurements and Disclosures, establishes a hierarchy of inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances. The fair value hierarchy is broken down into three levels based on the source of inputs as follows:

Level 1 – Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

Level 2 – Valuations based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and models for which all significant inputs are observable, either directly or indirectly.

Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement and that are based on management’s best estimate of inputs market participants would use for pricing the asset or liability at the measurement date, including assumptions about risk.

The following table summarizes the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value as of July 31, 2014:

	Total		Level 1		Level 2		Level 3
Assets:
Money market funds	$	20,011	$	20,011	$	—	$	—

The following table summarizes the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value as of January 31, 2014:

	Total		Level 1		Level 2		Level 3
Assets:
Money market funds	$	15,008	$	15,008	$	—	$	—

The availability of observable inputs can vary among the various types of financial assets and liabilities. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for financial statement disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is categorized is based on the lowest level input that is significant to the overall fair value measurement.

8. Acquired Intangible Assets

Intangible assets acquired in a business combination are recorded under the purchase method of accounting at their estimated fair values at the date of acquisition. The Company amortizes acquired intangible assets over their estimated useful lives.

The following table reflects the carrying value of intangible assets as of July 31, 2014:

	July 31, 2014
	Cost		Accumulated Amortization			Net Book Value
Intellectual property	$	3,505	$	(935	)	$	2,570
Access to facilities contract		38		(38	)		—
Total	$	3,543	$	(973	)	$	2,570

9

The following table reflects the carrying value of intangible assets as of January 31, 2014:

	January 31, 2014
	Cost		Accumulated Amortization			Net Book Value
Intellectual property	$	3,505	$	(760	)	$	2,745
Access to facilities contract		38		(38	)		—
Total	$	3,543	$	(798	)	$	2,745

For the three and six months ended July 31, 2014, amortization expense of intangible assets was $88 and $175, respectively. For the three and six months ended July 31, 2013, amortization expense of intangible assets was $87 and $175, respectively.

9. Commitments and Contingencies

Legal Contingencies

From time to time the Company is involved in legal proceedings arising in the ordinary course of business. There is no litigation pending that could, individually or in the aggregate, have a material adverse effect on the Company’s financial position, results of operations, or cash flows. In 2011, the Company was notified by the Massachusetts Institute of Technology, or MIT, that MIT believes that Exa is utilizing the intellectual property covered by a license agreement between the Company and MIT, and therefore is in arrears in the payment of royalties under the agreement. The Company has advised MIT that it does not believe that the Company utilized the underlying technology at any time since at least 1998, or that any royalties are owed under the agreement. MIT has not commenced suit against the Company with respect to its claims, and if any such suit is commenced by MIT, the Company intends to defend it vigorously. The Company believes that if MIT were to prevail in any such litigation, the royalties due under the terms of the license agreement, after giving effect to the approximately $200 in minimum royalties that the Company has already paid, would not exceed approximately $2,600 (excluding any interest or costs of litigation). The Company is not able to determine whether a loss is probable or estimate the reasonably possible or probable amount of such loss.

Guarantees and Indemnification Obligations

The Company enters into standard indemnification agreements in the ordinary course of business. Pursuant to these agreements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Company’s business partners or customers, in connection with any United States patent, or any copyright or other intellectual property infringement claim by any third party with respect to the Company’s products. The term of these indemnification provisions is generally perpetual after execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these agreements is unlimited.

Based on historical experience and information known as of July 31, 2014 and January 31, 2014, the Company has not recorded any liabilities for the above guarantees and indemnities.

10. Stock Based Compensation

On June 10, 2014, the Company’s stockholders approved the amendment and restatement of the Company’s 2011 Stock Incentive Plan. As a result, the number of shares available to be issued under the plan increased from 769,230 to 1,769,230 shares of common stock. Following this approval, the Company granted performance-based options to purchase an aggregate of 282,500 shares of common stock. The majority of the performance-based options are eligible to vest if certain specified targets are met in fiscal years 2015, 2016 and 2017. Performance-based stock options are recognized as expense when it becomes probable that performance measures triggering vesting will be met. As of July 31, 2014, the Company has concluded that it is not probable that any of the performance-based stock options will achieve the required metrics for vesting. As a result, the Company has not recognized any share-based compensation expense associated with these options.

The fair value of common stock options for employees and directors is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used:

	Six Months Ended July 31,
	2014			2013
Estimated dividend yield		0	%		0	%
Expected stock price volatility		47.3	%		50.5	%
Weighted-average risk-free interest rate		2.2	%		1.4	%
Expected life of options (in years)		6.51			6.25

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The weighted average grant date fair value per share for stock options granted in the three and six months ended July 31, 2014 was $4.40 and $5.24, respectively.

Total stock-based compensation expense related to stock options and restricted stock units issued by the Company is as follows:

	Three Months Ended July 31,				Six Months Ended July 31,
	2014		2013		2014		2013
Cost of revenues	$	44	$	33	$	82	$	64
Sales and marketing		86		52		161		102
Research and development		191		77		347		154
General and administrative		179		89		280		176
Total	$	500	$	251	$	870	$	496

The total unrecognized compensation cost related to outstanding stock options is $5,851 at July 31, 2014. This amount is expected to be recognized over a weighted-average period of 2.83 years.

11. Income Taxes

For the three and six months ended July 31, 2014, the Company’s income tax provision was $0.2 million and $15.7 million, respectively. The provision for the three months ended July 31, 2014 primarily consists of foreign income taxes. The provision for the six months ended July 31, 2014 includes a $14.5 million non-cash charge to record a valuation allowance against its United States net deferred tax assets and a $0.7 million non-cash write-off of state deferred tax assets (discussed further below). Through the three months ended April 30, 2014, the Company’s results reflected a three-year cumulative loss position in the United States; prior thereto, the Company’s historical results reflected a three-year cumulative profit. Reflecting management’s plans to continue investing in the business for future growth, management’s projections reflect the Company continuing in a three-year cumulative loss position through fiscal year 2015. This historical loss position at April 30, 2014 and projected cumulative loss position caused management to modify its assessment of its deferred tax assets, concluding that it no longer was more likely than not that these deferred tax assets would be realized and thus, a valuation allowance was necessary against the full amount of its United States net deferred tax assets.

Management will reassess the realization of the deferred tax assets each reporting period. To the extent that the financial results of the Company’s United States operations improve and the deferred tax asset becomes realizable, the Company will reduce the valuation allowance through earnings.

Under Section 382 of the Internal Revenue Code of 1986, as amended, substantial changes in the Company’s ownership may limit the amount of net operating loss carryforwards that can be utilized annually in the future to offset its United States federal taxable income. Specifically, this limitation may arise in the event of a cumulative change in ownership of the Company of more than 50% within a three-year period. During the first quarter of fiscal year 2015, management determined that the Company had experienced an ownership change for purposes of Section 382. This ownership change resulted in annual limitations to the amount of net operating loss carryforwards that can be utilized to offset future taxable income, if any, at the federal level. The annual limit is approximately $14.0 million for fiscal year 2015, $16.8 million for each of fiscal years 2016 through 2019, $8.1 million for fiscal year 2020 and $6.4 million for each fiscal year thereafter. The ownership change also resulted in the loss of the Company’s ability to utilize $0.7 million of its $0.8 million of state net operating loss carryforwards, credits and other state attributes, which resulted in a write-off of the $0.7 million of state deferred tax assets during the first quarter of fiscal year 2015.

The Company does not expect that its unrecognized tax benefit will change significantly within the next twelve months. The Company and one or more of its subsidiaries file United States federal income tax returns and tax returns in various state and foreign jurisdictions. With limited exceptions, the Company is no longer subject to federal, state, local or foreign examinations for years prior to January 31, 2011. However, carryforward attributes that were generated prior to January 31, 2011 may still be adjusted upon examination by state or local tax authorities if they either have been or will be used in a future period.

11

12. Geographic Information

Revenue is attributed to individual countries based upon location of the external customer. Revenue by geographic area is as follows:

	Three Months Ended July 31,				Six Months Ended July 31,
	2014		2013		2014		2013
United States	$	3,412	$	2,799	$	6,285	$	5,489
Japan		2,147		1,803		4,518		3,828
Germany		2,838		2,443		5,529		4,658
France		2,252		2,196		4,236		4,440
Korea		1,419		1,201		2,655		2,287
United Kingdom		1,266		1,175		2,388		2,264
Sweden		651		579		1,345		1,227
Other		858		508		1,657		999
Total	$	14,843	$	12,704	$	28,613	$	25,192

Net long-lived assets, consisting of net property and equipment, are subject to geographic risks because they are generally difficult to move and to effectively utilize in another geographic area in a reasonable time period and because they are relatively illiquid.

Net long-lived assets by principal geographic areas were as follows:

	July 31, 2014		January 31, 2014
United States	$	7,038	$	6,098
France		810		849
Germany		192		117
Japan		150		201
Other		89		91
Total property and equipment, net	$	8,279	$	7,356

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Result of Operations appearing in our Annual Report on Form 10-K, filed with the SEC on March 26, 2014. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, assumptions and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies and operations, financing plans, potential growth opportunities, potential market opportunities and the effects of competition. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or similar expressions and the negatives of those terms. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s plans, estimates, assumptions and beliefs only as of the date of this report. Except as required by law, we assume no obligation to update these forward-looking statements publicly or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

As used herein, except as otherwise indicated by context, references to “we,” “us,” “our,” or the “Company” refer to Exa Corporation.

Overview

We develop, sell and support simulation software and services that vehicle manufacturers use to enhance the performance of their products, reduce product development costs and improve the efficiency of their design and engineering processes. Our core product,

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PowerFLOW, is an innovative software solution for simulating complex fluid flow problems, including aerodynamics, thermal management, and aeroacoustics, or wind noise. Our solutions enable engineers and designers to augment or replace conventional methods of evaluating design alternatives that rely on expensive and inefficient physical prototypes and test facilities, such as wind tunnels, with accurate digital simulations that are more useful and timely. Our simulation solutions enable our customers to gain crucial insights about design performance early in the design cycle, reducing the likelihood of expensive redesigns and late-stage engineering changes. As a result, our customers realize significant cost savings and fundamental improvements in their vehicle development process.

Simulation-driven design has enabled product and process improvements in many industries, and as a result, the process in which products are conceptualized and developed is undergoing a radical transformation. Digital simulation not only provides feedback earlier and in a more useful form than traditional approaches, but in many areas simulation has reached a level of accuracy and robustness that is sufficient to enable a manufacturer to rely solely on its results for design decisions, without prototype testing.

Global vehicle manufacturers face increasing pressure, from government mandates as well as from consumers, to improve the efficiency of their products and to reduce particulate and greenhouse gas emissions. This requires different powertrain choices (diesel, electric, hybrid), changes in the shape of the vehicle, and reductions in vehicle weight. Consumers also demand improved quality and durability, and equally important, innovative and emotionally expressive designs. In addition, manufacturers are offering a broader array of vehicles for different niche customer segments and geographies on a faster design refresh schedule than in the past. We believe these industry forces favor the adoption of simulation-driven design.

One of the most critical challenges for our customers in their vehicle development processes is measuring or predicting how a vehicle feature or a mechanical system will interact with air, water or other fluids. For example, developing vehicles with reduced aerodynamic drag is critical to achieving the improvements in fuel efficiency that are increasingly desired by customers and mandated by government regulations. Our core product, PowerFLOW, is an innovative software solution for simulating complex fluid flow problems, including aerodynamics, thermal management, and aeroacoustics, or wind noise. PowerFLOW relies upon a proprietary technology that we refer to as Digital Physics, based on algorithms known as the lattice Boltzmann method. Our proprietary technology enables PowerFLOW to predict complex fluid flows with a level of reliability comparable to or better than physical testing. The combination of PowerFLOW’s accuracy and timeliness provides results that are superior to those of alternative computational fluid dynamics, or CFD, methods.

We currently focus primarily on the ground transportation market, including manufacturers in the passenger vehicle, highway truck, off-highway vehicle and train markets, as well as their suppliers. Over 125 manufacturers currently utilize our products and services, including 14 of the global top 15 passenger vehicle manufacturer groups such as BMW, Ford, Hyundai, Jaguar Land Rover, Nissan, Porsche, Renault, Toyota and Volkswagen; truck and off-highway vehicle manufacturers such as Hyundai, Kenworth, Kobelco, MAN, Peterbilt, Scania and Volvo Truck; and suppliers to these manufacturers, such as Cummins, Denso and Magna Steyr.

During fiscal 2015, we have continued to make significant strategic investments to bring additional ground transportation applications to market as well as products for the aerospace and oil and gas production markets. As we continue to grow, we will continue to explore other markets where we believe the capabilities of PowerFLOW can be broadly applied such as the chemical processing, architecture, engineering and construction, power generation, biomedical and electronics industries.

We derive our revenue primarily from the sale of our simulation software, using an annual capacity-based licensing model. Customers usually purchase PowerFLOW simulation capacity under one-year licenses. Simulation capacity may be purchased as software-only, to be run on the customer’s own computer hardware, or provided in the form of software-as-a-service, via our hosted PowerFLOW OnDemand offering. To introduce new customers to our simulation solutions, we typically perform fixed-price projects that include simulation services accessed via our OnDemand facilities, along with engineering and consulting services. Customers typically license our products for one application, such as aerodynamics, and over time expand to other applications such as thermal management or aeroacoustics.

We sell our products and project services primarily through our direct sales force, including sales executives and applications engineering teams deployed near our customers in the United States, United Kingdom, France, Germany, Italy, Japan, Korea and China and through a distributor in India and through a sales agent in Brazil. In our customer engagement model, our applications management teams engage with our customers in long-term relationships focused on identifying problems that we can help them solve, demonstrating the value of our solutions and ensuring that the customer achieves maximum benefit from them. In this process we interact continuously with our customers to improve our software and services and add new solutions, and at the same time deepen our knowledge of their industry.

We were founded in 1991 and had 283 employees worldwide at July 31, 2014. Our corporate headquarters, including our principal administrative, marketing, technical support, research and product development facilities, is located in Burlington, Massachusetts.

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Results of Operations for the Three Months Ended July 31, 2014 and 2013

The following tables set forth, for the periods presented, data from our consolidated statements of operation, as well as that data as a percentage of revenues.

	Three Months Ended July 31,
(in thousands)	2014			2013
Revenue:
License revenue	$	12,316		$	10,719
Project revenue		2,527			1,985
Total revenues		14,843			12,704
Operating expenses: (1)
Cost of revenues		4,632			3,833
Sales and marketing		2,509			2,179
Research and development		5,404			4,450
General and administrative (2)		3,217			2,426
Total operating expenses		15,762			12,888
Loss from operations		(919	)		(184	)
Other income (expense), net:
Foreign exchange gain (loss)		175			(93	)
Interest expense		(94	)		(176	)
Interest income		2			5
Loss on extinguishment of debt		—			(755	)
Other income, net		3			3
Total other income (expense), net		86			(1,016	)
Loss before income taxes		(833	)		(1,200	)
(Provision) benefit for income taxes		(176	)		402
Net loss	$	(1,009	)	$	(798	)

(1) Amounts include stock-based compensation expense as follows:

	Three Months Ended July 31,
(in thousands)	2014		2013
Cost of revenues	$	44	$	33
Sales and marketing		86		52
Research and development		191		77
General and administrative		179		89
Total stock-based compensation expense	$	500	$	251
(2)    Includes amortization expense related to intangible assets as follows:
General and administrative		88		87

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	Three Months Ended July 31,
(as a percent of total revenue)	2014			2013
Revenue:
License revenue		83.0	%		84.4	%
Project revenue		17.0	%		15.6	%
Total revenues		100.0	%		100.0	%
Operating expenses:
Cost of revenues		31.2	%		30.2	%
Sales and marketing		16.9	%		17.2	%
Research and development		36.4	%		35.0	%
General and administrative		21.7	%		19.1	%
Total operating expenses		106.2	%		101.4	%
Loss from operations		(6.2	)%		(1.4	)%
Other expense, net:
Foreign exchange (loss) gain		1.2	%		(0.7	)%
Interest expense		(0.6	)%		(1.4	)%
Interest income		0.0	%		0.0	%
Loss on extinguishment of debt		0.0	%		(5.9	)%
Other income, net		0.0	%		0.0	%
Total other expense, net		0.6	%		(8.0	)%
Loss before income taxes		(5.6	)%		(9.4	)%
(Provision) benefit for income taxes		(1.2	)%		3.2	%
Net loss		(6.8	)%		(6.3	)%

Due to rounding, totals may not equal the sum of line items in the table above.

Comparison of Three Months Ended July 31, 2014 and 2013

Revenue

	Three Months Ended July 31,
(in thousands, except percentages)	2014		2013		Increase		% Change
License revenue	$	12,316	$	10,719	$	1,597		14.9	%
Project revenue		2,527		1,985		542		27.3	%
Total revenues	$	14,843	$	12,704	$	2,139		16.8	%

License revenue increased 14.9%, from $10.7 million for the three months ended July 31, 2013 to $12.3 million for the three months ended July 31, 2014. The $1.6 million increase was driven almost entirely by increased utilization of simulation capacity by existing customers. Project revenue increased $0.5 million during the three months ended July 31, 2014 compared to the three months ended July 31, 2013 due to expanded sales and engineering efforts and greater activity with existing customers.

Foreign exchange fluctuations, particularly the strengthening of the Euro, positively impacted total revenue in the three months ended July 31, 2014 by $0.2 million as compared to the three months ended July 31, 2013. On a constant currency basis, our total revenues in the three months ended July 31, 2014 increased 15.1%, compared with the three months ended July 31, 2013.

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Cost of revenue

	Three Months Ended July 31,
(in thousands, except percentages)	2014		2013		Increase		% Change
Cost of revenue	$	4,632	$	3,833	$	799		20.8	%

Cost of revenue for the three months ended July 31, 2014 was $4.6 million, an increase of $0.8 million, or 20.8%, compared with $3.8 million during the three months ended July 31, 2013. As a percentage of revenues, cost of revenues increased to 31.2% for the three months ended July 31, 2014 compared to 30.2% for the three months ended July 31, 2013. Increased payroll and employee related costs, including travel, accounted for approximately $0.5 million of the increase, primarily as a result of the net addition of 14 new application engineers and merit-based compensation increases for existing personnel. In addition, royalty costs increased by $0.2 million due to increased invoicing by the Company and amendments to certain royalty agreements. The balance of the increase is primarily attributable to capacity expansions at our New Jersey data center resulting increased facility and hosting costs of approximately $0.1 million.

Sales and marketing

	Three Months Ended July 31,
(in thousands, except percentages)	2014		2013		Increase		% Change
Sales and marketing	$	2,509	$	2,179	$	330		15.1	%

Sales and marketing expenses for the three months ended July 31, 2014 were $2.5 million, an increase of $0.3 million, or 15.1% compared to $2.2 million for the three months ended July 31, 2013. As a percentage of revenues, sales and marketing expenses decreased to 16.9% for the three months ended July 31, 2014 compared to 17.2% for the three months ended July 31, 2013. Increased non-commission payroll and employee related costs accounted for approximately $0.1 million of the increase, primarily as a result of the net addition of 4 new sales people, manager and executive level promotions and merit-based compensation increases for existing personnel. Commission expense increased by approximately $0.1 million, primarily due to an increase in invoicing levels during the three months ended July 31, 2014 as compared to the prior fiscal year period. The balance of the increase is primarily attributable to increased marketing and trade show expenses.

Research and development

	Three Months Ended July 31,
(in thousands, except percentages)	2014		2013		Increase		% Change
Research and development	$	5,404	$	4,450	$	954		21.4	%

Research and development expenses for the three months ended July 31, 2014 were $5.4 million, an increase of $1.0 million, or 21.4%, compared to $4.5 million for the three months ended July 31, 2013. As a percentage of revenues, research and development expense increased to 36.4% for the three months ended July 31, 2014 compared to 35.0% for the three months ended July 31, 2013. Increased payroll and employee related costs accounted for approximately $0.6 million of the increase, primarily as a result of the net addition of 13 new scientists and software engineers and merit-based compensation increases for existing personnel. In addition, approximately $0.3 million of the increase is attributable to capacity expansions at our New Jersey data center resulting in increased facility and hosting costs. Lastly, approximately $0.1 million of the increase is attributable to increased software consulting costs related to product development.

General and administrative

	Three Months Ended July 31,
(in thousands, except percentages)	2014		2013		Increase		% Change
General and administrative	$	3,217	$	2,426	$	791		32.6	%

General and administrative expenses for the three months ended July 31, 2014 were $3.2 million, an increase of $0.8 million, or 32.6%, compared to $2.4 million for the three months ended July 31, 2013. As a percentage of revenues, general and administrative expenses increased to 21.7% for the three months ended July 31, 2014, compared to 19.1% for the three months ended July 31, 2013.

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Increased payroll and employee related costs accounted for approximately $0.3 million of the increase, primarily as a result of the net addition of 3 new support personnel and compensation increases for existing personnel, including increased stock-based compensation expense associated with employee equity awards that were granted in the second quarter of fiscal year 2015. Approximately $0.3 million of the increase is primarily attributable to professional service fees, including costs associated with a tax study, a foreign statutory audit, patent legal fees and recruiting services. The balance of the increase is primarily attributable to increased Internet service charges.

Other income (expense), net

	Three Months Ended July 31,
(in thousands, except percentages)	2014		2013			Increase		% Change
Other income (expense), net	$	86	$	(1,016	)	$	1,102		108.5	%

For the three months ended July 31, 2014, other income, net was $0.1 million, as compared to other expense, net of $1.0 million for the three months ended July 31, 2013. Other income, net for the three-months ended July 31, 2014 primarily consisted of $0.2 million of foreign exchange gains, partially offset by $0.1 million of interest expense. Other expense, net for the three months ended July 31, 2013 primarily consisted of a $0.8 million loss from the extinguishment of debt related to the repayment of all outstanding obligations under our loan and security agreement in May 2013 and interest expense of $0.2 million.

(Provision) benefit for income taxes

	Three Months Ended July 31,
(in thousands, except percentages)	2014			2013		Change			% Change
(Provision) benefit for income taxes	$	(176	)	$	402	$	(578	)		(143.8	)%

Income taxes changed from a $0.4 million benefit in the three months ended July 31, 2013 to a provision of $0.2 million in the three months ended July 31, 2014. The provision for the three months ended July 31, 2014 primarily consists of foreign income taxes. For the three months ended July 31, 2013, the effective income tax rate differed from the federal statutory rate mainly due to nondeductible compensation offset by the tax benefit of federal and state research and development credits. The effective tax rate for the three months ended July 31, 2013 was also impacted discretely by foreign exchange gains and losses and the loss on extinguishment of debt.

We do not expect that our unrecognized tax benefit will change significantly within the next twelve months. We and one or more of our subsidiaries file United States federal income tax returns and tax returns in various state and foreign jurisdictions. With limited exceptions, we are no longer subject to federal, state, local or foreign examinations for years prior to January 31, 2011. However, carryforward attributes that were generated prior to January 31, 2011 may still be adjusted upon examination by state or local tax authorities if they either have been or will be used in a future period.

17

Results of Operations for the Six Months Ended July 31, 2014 and 2013

The following tables set forth, for the periods presented, data from our consolidated statements of operation, as well as that data as a percentage of revenues.

	Six Months Ended July 31,
(in thousands)	2014			2013
Revenue:
License revenue	$	23,976		$	21,411
Project revenue		4,637			3,781
Total revenues		28,613			25,192
Operating expenses: (1)
Cost of revenues		9,228			7,504
Sales and marketing		5,076			4,296
Research and development		10,506			8,836
General and administrative (2)		6,339			5,197
Total operating expenses		31,149			25,833
Loss from operations		(2,536	)		(641	)
Other expense, net:
Foreign exchange gain (loss)		131			(56	)
Interest expense		(177	)		(557	)
Interest income		6			9
Loss on extinguishment of debt		—			(755	)
Other income, net		3			5
Total other expense, net		(37	)		(1,354	)
Loss before income taxes		(2,573	)		(1,995	)
(Provision) benefit for income taxes		(15,656	)		656
Net loss	$	(18,229	)	$	(1,339	)

(1) Amounts include stock-based compensation expense as follows:

	Six Months Ended July 31,
(in thousands)	2014		2013
Cost of revenues	$	82	$	64
Sales and marketing		161		102
Research and development		347		154
General and administrative		280		176
Total stock-based compensation expense	$	870	$	496
(2)    Includes amortization expense related to intangible assets as follows:
General and administrative		175		175

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	Six Months Ended July 31,
(as a percent of total revenue)	2014			2013
Revenue:
License revenue		83.8	%		85.0	%
Project revenue		16.2	%		15.0	%
Total revenues		100.0	%		100.0	%
Operating expenses:
Cost of revenues		32.3	%		29.8	%
Sales and marketing		17.7	%		17.1	%
Research and development		36.7	%		35.1	%
General and administrative		22.2	%		20.6	%
Total operating expenses		108.9	%		102.5	%
Loss from operations		(8.9	)%		(2.5	)%
Other expense, net:
Foreign exchange (loss) gain		0.5	%		(0.2	)%
Interest expense		(0.6	)%		(2.2	)%
Interest income		0.0	%		0.0	%
Loss on extinguishment of debt		0.0	%		(3.0	)%
Other income, net		0.0	%		0.0	%
Total other expense, net		(0.1	)%		(5.4	)%
Loss before income taxes		(9.0	)%		(7.9	)%
(Provision) benefit for income taxes		(54.7	)%		2.6	%
Net loss		(63.7	)%		(5.3	)%
Due to rounding, totals may not equal the sum of line items in the table above.

Comparison of Six Months Ended July 31, 2014 and 2013

Revenue

	Six Months Ended July 31,
(in thousands, except percentages)	2014		2013		Increase		% Change
License revenue	$	23,976	$	21,411	$	2,565		12.0	%
Project revenue		4,637		3,781		856		22.6	%
Total revenues	$	28,613	$	25,192	$	3,421		13.6	%

License revenue increased 12.0%, from $21.4 million for the six months ended July 31, 2013 to $24.0 million for the six months ended July 31, 2014. The $2.6 million increase was driven almost entirely by increased utilization of simulation capacity by existing customers. Project revenue increased $0.9 million during the six months ended July 31, 2014 compared to the six months ended July 31, 2013 due to expanded sales and engineering efforts and greater activity with existing customers.

Foreign exchange fluctuations, particularly the strengthening of the Euro, positively impacted total revenue in the six months ended July 31, 2014 by $0.3 million as compared to the six months ended July 31, 2013. On a constant currency basis, our total revenues in the six months ended July 31, 2014 increased 12.5%, compared with the six months ended July 31, 2013.

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Cost of revenue

	Six Months Ended July 31,
(in thousands, except percentages)	2014		2013		Increase		% Change
Cost of revenue	$	9,228	$	7,504	$	1,724		23.0	%

Cost of revenue for the six months ended July 31, 2014 was $9.2 million, an increase of $1.7 million, or 23.0%, compared with $7.5 million during the six months ended July 31, 2013. As a percentage of revenues, cost of revenues increased to 32.3% for the six months ended July 31, 2014 compared to 29.8% for the six months ended July 31, 2013. Increased payroll and employee related costs, including travel, accounted for approximately $1.2 million of the increase, primarily as a result of the net addition of 14 new application engineers and merit-based compensation increases for existing personnel. In addition, royalty costs increased by $0.4 million due to increased invoicing by the Company and amendments to certain royalty agreements. The balance of the increase is primarily attributable to capacity expansions at our New Jersey data center resulting increased facility and hosting costs of approximately $0.1 million.

Sales and marketing

	Six Months Ended July 31,
(in thousands, except percentages)	2014		2013		Increase		% Change
Sales and marketing	$	5,076	$	4,296	$	780		18.2	%

Sales and marketing expenses for the six months ended July 31, 2014 were $5.1 million, an increase of $0.8 million, or 18.2% compared to $4.3 million for the six months ended July 31, 2013. As a percentage of revenues, sales and marketing expenses increased to 17.7% for the six months ended July 31, 2014 compared to 17.1% for the six months ended July 31, 2013. Increased non-commission payroll and employee related costs accounted for approximately $0.5 million of the increase, primarily as a result of the net addition of 4 new sales people, manager and executive level promotions and merit-based compensation increases for existing personnel. Commission expense increased by approximately $0.3 million, primarily due to an increase in invoicing levels during the six months ended July 31, 2014, as compared to the prior fiscal year period.

Research and development

	Six Months Ended July 31,
(in thousands, except percentages)	2014		2013		Increase		% Change
Research and development	$	10,506	$	8,836	$	1,670		18.9	%

Research and development expenses for the six months ended July 31, 2014 were $10.5 million, an increase of $1.7 million, or 18.9%, compared to $8.8 million for the six months ended July 31, 2013. As a percentage of revenues, research and development expense increased to 36.7% for the six months ended July 31, 2014 compared to 35.1% for the six months ended July 31, 2013. Increased payroll and employee related costs accounted for approximately $1.1 million of the increase, primarily as a result of the net addition of 13 new scientists and software engineers and merit-based compensation increases for existing personnel. In addition, capacity expansions at our New Jersey data center resulted in increased facility and hosting costs of approximately $0.5 million. The balance of the increase is primarily attributable to increased software consulting costs related to product development.

General and administrative

	Six Months Ended July 31,
(in thousands, except percentages)	2014		2013		Increase		% Change
General and administrative	$	6,339	$	5,197	$	1,142		22.0	%

General and administrative expenses for the six months ended July 31, 2014 were $6.3 million, an increase of $1.1 million, or 22.0%, compared to $5.2 million for the six months ended July 31, 2013. As a percentage of revenues, general and administrative expenses increased to 22.2% for the six months ended July 31, 2014, compared to 20.6% for the six months ended July 31, 2013. Increased payroll and employee related costs accounted for approximately $0.7 million of the increase, primarily as a result of the net addition of 3 new support personnel and compensation increases for existing personnel, including increased stock-based compensation associated with employee equity awards that were granted in the second quarter of fiscal year 2015. Approximately

20

$0.3 million of the increase is primarily attributable to professional service fees, including costs associated with a tax study, a foreign statutory audit, patent legal fees and recruiting services. The balance of the increase is primarily attributable to increased Internet service charges.

Other expense, net

	Six Months Ended July 31,
(in thousands, except percentages)	2014			2013			Increase		% Change
Other expense, net	$	(37	)	$	(1,354	)	$	1,317		97.3	%

For the six months ended July 31, 2014, other expense, net was less than $0.1 million, as compared to other expense, net of $1.4 million for the six months ended July 31, 2013. Other expense, net for the six months ended July 31, 2014 primarily consists of $0.2 million in interest expense partially offset by $0.1 million of foreign exchange gains. Other expense, net for the six months ended July 31, 2013 primarily consisted of a $0.8 million loss from the extinguishment of debt related to the repayment of all outstanding obligations under our loan and security agreement in May 2013 and interest expense of $0.6 million.

(Provision) benefit for income taxes

	Six Months Ended July 31,
(in thousands, except percentages)	2014			2013		Change			% Change
(Provision) benefit for income taxes	$	(15,656	)	$	656	$	(16,312	)		(2,486.6	)%

For the six months ended July 31, 2014, our income tax provision was $15.7 million which includes a $14.5 million non-cash charge to record a valuation allowance against our United States net deferred tax assets and a $0.7 million non-cash write-off of state deferred taxes (discussed further below). Through the three months ended April 30, 2014, our results reflected a three-year cumulative loss position in the United States; prior thereto, our historical results reflected a three-year cumulative profit. Reflecting management’s plans to continue investing in the business for future growth, management’s projections reflect our continuing in a three-year cumulative loss position through fiscal year 2015. This historical loss position at April 30, 2014 and projected cumulative loss position caused management to modify its assessment of its deferred tax assets, concluding that it no longer was more likely than not that these deferred tax assets would be realized and thus, a valuation allowance was necessary against the full amount of its United States net deferred tax assets. Note that most of our revenues are generated from ground transportation customers outside the United States but a significantly disproportionate amount of our operating expenses, including investments in future products, are incurred in the United States, causing the results of operations in the United States to reflect losses during this period of investment.

Management will reassess the realization of the deferred tax assets each reporting period. To the extent that the financial results of our United States operations improve and the deferred tax asset becomes realizable, we will reduce the valuation allowance through earnings.

Under Section 382 of the Internal Revenue Code of 1986, as amended, substantial changes in our ownership may limit the amount of net operating loss carryforwards that can be utilized annually in the future to offset its United States federal taxable income. Specifically, this limitation may arise in the event of a cumulative change in ownership of the Company of more than 50% within a three-year period. During the first quarter of fiscal year 2015, management determined that we had experienced an ownership change for purposes of Section 382. This ownership change resulted in annual limitations to the amount of net operating loss carryforwards that can be utilized to offset future taxable income, if any, at the federal level. The annual limit is approximately $14.0 million for fiscal year 2015, $16.8 million for each of fiscal years 2016 through 2019, $8.1 million for fiscal year 2020 and $6.4 million for each fiscal year thereafter. The ownership change also resulted in the loss of our ability to utilize $0.7 million of its $0.8 million of state net operating loss carryforwards, credits and other state attributes, which resulted in a write-off of the $0.7 million of state deferred tax assets during the first quarter of fiscal year 2015.

We do not expect that our unrecognized tax benefit will change significantly within the next twelve months. We and one or more of our subsidiaries file United States federal income tax returns and tax returns in various state and foreign jurisdictions. With limited exceptions, we are no longer subject to federal, state, local or foreign examinations for years prior to January 31, 2011. However, carryforward attributes that were generated prior to January 31, 2011 may still be adjusted upon examination by state or local tax authorities if they either have been or will be used in a future period.

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Non-GAAP Measures

From time to time we provide certain non-GAAP financial measures to investors as additional information in order to supplement our consolidated financial statements, which are presented in accordance with accounting principles generally accepted in the United States, or GAAP. The non-GAAP financial information presented here should be considered in conjunction with, and not as a substitute for, or superior to, the financial information presented in accordance with GAAP and should not be considered a measure of our liquidity. There are significant limitations associated with the use of non-GAAP financial measures. Further, these measures may differ from the non-GAAP information, even where similarly titled or used by other companies and therefore should not be used to compare our performance to that of other companies.

Revenue on a constant currency basis. Our international operations generate and incur expenses that are denominated in foreign currencies, and changes in currency exchange rates can materially affect our consolidated results of operations. Our principal exposures are to fluctuations in exchange rates for the United States dollar versus the British pound, Chinese yuan, Euro, Japanese yen, and Korean won. To provide investors with information concerning underlying trends in our business, we disclose revenue on a constant currency basis, which we define as GAAP revenue, adjusted to reverse the impact of changes in the exchange rates of the principal currencies in which our international operations generated revenue and incurred expenses. We calculate revenue on a constant currency basis by converting revenue that was generated in the currencies specified above during the three and six months ended July 31, 2014 to United States Dollars at assumed exchange rates equal to the exchange rates in effect for such currencies during the corresponding period of the previous fiscal year, rather than the exchange rates actually in effect during the current fiscal year.

Adjusted EBITDA. We define Adjusted EBITDA as EBITDA, excluding non-cash, stock-based compensation expense. We define EBITDA as net loss, excluding depreciation and amortization, interest expense, loss on extinguishment of debt, other income (expense), foreign exchange gain (loss) and provision for income taxes. The GAAP measure most comparable to Adjusted EBITDA is net income.

Non-GAAP operating (loss) income. We define non-GAAP operating (loss) income as GAAP operating (loss) income excluding non-cash, stock-based compensation expense and amortization of acquired intangible assets. The GAAP measure most comparable to non-GAAP operating (loss) income is operating (loss) income.

Non-GAAP net loss. We define non-GAAP net loss as GAAP net loss excluding the after tax impact of non-cash, stock-based compensation expense and amortization of acquired intangible assets. The GAAP measure most comparable to non-GAAP net loss is net loss.

Non-GAAP net loss per diluted share. We define non-GAAP net loss per diluted share as GAAP net loss per diluted share excluding the after tax impact of non-cash, stock-based compensation expense and amortization of acquired intangible assets. The GAAP measure most comparable to non-GAAP net loss per diluted share is net loss per diluted share.

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Our management uses these non-GAAP financial measures to evaluate our operating performance and for internal planning and forecasting purposes. We believe that these measures help identify underlying trends in our business, are useful for comparing current results with prior period results, and are helpful to investors and financial analysts in assessing our operating performance. For example, our management considers Adjusted EBITDA to be an important indicator of our operational strength and the performance of our business and a good measure of our historical operating trends. However, each of these non-GAAP financial measures may have limitations as an analytical tool. In considering our Adjusted EBITDA, non-GAAP operating loss, non-GAAP net loss and non-GAAP net loss per diluted share, investors should take into account the following reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures:

Adjusted EBITDA:

	Three Months Ended     July 31,						Six Months Ended     July 31,
(in thousands)	2014			2013			2014			2013
Net loss	$	(1,009	)	$	(798	)	$	(18,229	)	$	(1,339	)
Add back:
Depreciation and amortization		731			543			1,394			1,039
Interest expense, net		92			171			171			548
Loss on extinguishment of debt		—			755			—			755
Other income, net		(3	)		(3	)		(3	)		(5	)
Foreign exchange (gain) loss		(175	)		93			(131	)		56
Provision (benefit) for income taxes		176			(402	)		15,656			(656	)
EBITDA		(188	)		359			(1,142	)		398
Stock-based compensation expense		500			251			870			496
Adjusted EBITDA	$	312		$	610		$	(272	)	$	894

Non-GAAP operating (loss) income:

	Three Months Ended     July 31,						Six Months Ended     July 31,
(in thousands)	2014			2013			2014			2013
Operating loss	$	(919	)	$	(184	)	$	(2,536	)	$	(641	)
Add back:
Stock-based compensation expense		500			251			870			496
Amortization of acquired intangible assets		88			87			175			175
Non-GAAP operating (loss) income	$	(331	)	$	154		$	(1,491	)	$	30

Non-GAAP net loss:

	Three Months Ended     July 31,						Six Months Ended  ��  July 31,
(in thousands)	2014			2013			2014			2013
Net loss	$	(1,009	)	$	(798	)	$	(18,229	)	$	(1,339	)
Add back:
Stock-based compensation expense		500			251			870			496
Amortization of acquired intangible assets		88			87			175			175
Income tax effect (1)		(203	)		(117	)		(363	)		(233	)
Non-GAAP net loss	$	(624	)	$	(577	)	$	(17,547	)	$	(901	)

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Non-GAAP net loss, per diluted share:

	Three Months Ended     July 31,						Six Months Ended     July 31,
	2014			2013			2014			2013
Net loss, per diluted share (2)	$	(0.07	)	$	(0.06	)	$	(1.34	)	$	(0.10	)
Add back:
Stock-based compensation expense		0.04			0.02			0.06			0.04
Amortization of acquired intangible assets		0.01			0.01			0.01			0.01
Income tax effect (1)		(0.02	)		(0.01	)		(0.03	)		(0.02	)
Non-GAAP net loss, per diluted share (2)(3):	$	(0.05	)	$	(0.04	)	$	(1.29	)	$	(0.07	)

(1) The tax effect of non-cash stock-based compensation expense and non-cash amortization of acquired intangibles is estimated using a blended rate equivalent to our annual estimated United States federal tax rate and our state tax rate, exclusive of our net federal benefit. This rate is based on our estimated annual GAAP income tax rate forecast. Our estimated tax rate on non-GAAP income is determined annually and may be adjusted during the year to take into account events or trends that we believe materially impact the estimated annual rate including, but not limited to, significant changes resulting from tax legislation, revenues and expenses and other significant events. Due to the differences in the tax treatment of items excluded from non-GAAP earnings, as well as the methodology applied to our estimated annual tax rates as described above, our estimated tax rate on non-GAAP income may differ from our GAAP tax rate and from our actual tax liabilities.

(2) Share amounts utilized on a fully diluted basis were approximately 13.8 million and 13.6 million, respectively, for the three and six months ended July 31, 2014 and 13.3 million for both the three and six months ended July 31, 2013.

(3) Due to rounding, totals may not equal the sum of line items in the table above.

Liquidity

Overview

Our primary sources of liquidity during the six months ended July 31, 2014 were cash and cash equivalents on hand and cash flows provided by operating activities. Our primary uses of cash during the six months ended July 31, 2014 were capital expenditures and capital lease obligations. As of July 31, 2014, we had $32.0 million in cash and cash equivalents.

On December 10, 2013, we filed a shelf registration statement on Form S-3, which included a base prospectus relating to, among other things, the registration of $75 million of our common stock that may be offered and sold by us from time to time pursuant to Rule 415 promulgated under the Act, in amounts, at prices and on terms to be determined at the time of the offering.

Net Cash Flows from Operating Activities

Variations in the amount of our net cash provided or used by operating activities are primarily the result of changes in the amount of our working capital accounts, mainly accounts receivable and deferred revenue, the timing of cash payments from our customers and of our cash expenditures, principally employee salaries, accounts payable and payments of value added taxes and consumption taxes on the receivables of our foreign subsidiaries.

Cash payments from our customers fluctuate due to timing of new and renewal license sales, which typically coincide with our customers’ budget cycles. The fourth quarter of each fiscal year generally has the highest license sales, with payment of the license fee becoming due at the commencement of the license term. As a result, our cash flows from operations are typically highest in the first quarter of each fiscal year. Generally, customers are invoiced in advance for their annual subscription fee and the invoices are recorded in accounts receivable and deferred revenue, with deferred revenues being recognized ratably over the term of the subscription agreement. Increases in deferred revenue are attributable to growth in new business, offset by the related license revenues that are recognized ratably over time.

For the six months ended July 31, 2014, net cash provided by operating activities totaled $4.8 million, as compared to $11.4 million over the six months ended July 31, 2013. The overall decrease in cash provided by operating activities for the six months ended July 31,

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2014 as compared to the prior year period is primarily due to decreased profitability and fluctuations in working capital. Accounts receivable decreased $19.4 million during the current year period compared to $23.0 million in the prior year period, primarily due to the timing of collections from certain large customers. In addition, accrued expenses decreased by $4.1 million during the current year period compared to $2.2 million in the prior year period, primarily due to the timing of value-added-tax, commission and compensation payments. Lastly, deferred revenue decreased $9.4 million during the current year period compared to $8.2 million in the prior year period, due primarily to the timing of invoicing for customer license orders.

Net Cash Flows from Investing Activities

Net cash used in investing activities for the six months ended July 31, 2014 and 2013 was $0.6 million for both periods. Investing activities consist of expenditures for purchases of property and equipment to support the growth in our business operations.

Net Cash Flows from Financing Activities

Net cash used in financing activities for the six months ended July 31, 2014 was $0.9 million, which consists primarily of payments on our capital lease obligations of $1.4 million, partially offset by proceeds from stock option exercises of $0.4 million. Net cash used in financing activities for the six months ended July 31, 2013 was $8.5 million, which consisted primarily of long-term debt payments of $7.4 million, payment of previously accrued debt issuance costs of $0.2 million and payments on our capital lease obligations of $1.0 million.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of either July 31, 2014 or January 31, 2014.

Capital Resources

Our future capital requirements may vary materially from those now planned and will depend on many factors, including the costs to develop and implement new solutions and applications, the sales and marketing resources needed to further penetrate our market and gain acceptance of new solutions and applications we develop, the expansion of our operations in the United States and internationally and the response of competitors to our solutions and applications. Historically, we have experienced increases in our expenditures consistent with the growth in our operations and personnel, and we anticipate that our expenditures will continue to increase as we grow our business. Our practice has been to reinvest the undistributed earnings of our foreign subsidiaries in their local jurisdictions, and we currently do not intend to repatriate such earnings. As of July 31, 2014 and January 31, 2014, $10.3 million and $8.0 million, respectively, of our cash is held in bank accounts outside the United States and may not be completely available to fund our domestic operations and obligations without paying taxes upon repatriation.

We expect to be able to meet the funding needs of our United States operations and do not intend on repatriating undistributed earnings that have been indefinitely reinvested in our international subsidiaries.

We believe our cash on hand and cash flows from our operations will be sufficient to meet our working capital and capital expenditure requirements for the foreseeable future, including at least the next twelve months.

Seasonality

We have experienced and expect to continue to experience seasonal variations in the timing of customers’ purchases of our software products. Many customers make purchase decisions based on their budget cycles, which typically coincide with the calendar year, except in Japan, where our customer budget cycles typically begin on April 1. Because our software products are sold pursuant to annual subscription agreements and we recognize revenue from these subscriptions over the term of the agreement, downturns or upturns in invoices may not be immediately reflected in our operating results. However, these seasonal trends materially affect the timing of our cash flows, as we generally receive the annual license fee at the time the license term commences. As a result, our cash flows from operations are typically highest in the first quarter of each fiscal year.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange Risk

As we conduct business in multiple international currencies throughout the world, our international operations generate and incur expenses that are denominated in foreign currencies. These amounts could be materially affected by currency fluctuations. Our principal exposures are to fluctuations in exchange rates for the United States dollar versus the British pound, Chinese yuan, Euro, Japanese yen, and Korean won. Changes in currency exchange rates could adversely affect our consolidated results of operations or financial position. Additionally, our international operations maintain cash balances denominated in foreign currencies. To reduce the

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risk associated with translation of foreign cash balances into our reporting currency, we typically avoid maintaining excess cash balances in foreign currencies. To date, we have not hedged our exposure to changes in foreign currency exchange rates and, as a result, we could incur unanticipated translation gains and losses.

The Euro was approximately 4.4% and 4.7% stronger against the United States dollar on average, for the three and six months ended July 31, 2014, respectively, when compared with the three and six months ended July 31, 2013. The resulting net overall impact to revenue was an increase of approximately $0.3 million and $0.5 million, during the three and six months ended July 31, 2014, respectively. The resulting net overall impact to operating expenses was an increase of approximately $0.2 million and $0.3 million during the three and six months ended July 31, 2014, respectively.

The exchange rate impact of other currencies for the three months ended July 31, 2014, primarily driven by a weaker Japanese yen, was a decrease to revenue of less than $0.1 million and an increase to operating expense of less than $0.1 million. The exchange rate impact of other currencies for the six months ended July 31, 2014, primarily driven by a weaker Japanese yen, was a decrease to revenue and operating expense of approximately $0.2 million and less than $0.1 million, respectively.

For the three months ended July 31, 2014, a 10% change in the exchange rates for the United States dollar versus the British pound, Chinese yuan, Euro, Japanese yen, and Korean won would have resulted in a $0.9 million change in revenue. For the six months ended July 31, 2014, a 10% change in the exchange rates for the United States dollar versus the British pound, Chinese yuan, Euro, Japanese yen, and Korean won would have resulted in a $1.7 million change in revenue.

Interest Rate Sensitivity

Since the payoff of all outstanding obligations under our loan and security agreement in May 2013, our interest expense consists solely of fixed-rate interest under our outstanding capital lease obligations. As a result, we do not believe that we are exposed to material interest rate risk at this time. Interest income is sensitive to changes in the general level of United States and international interest rates. The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. Our cash and cash equivalents are relatively insensitive to interest rate changes. In future periods, we will continue to evaluate our investment policy in order to ensure that we continue to meet our overall objectives.

We do not believe that a 10% change in interest rates would have a material impact on our financial position or results of operations.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and we necessarily were required to apply our judgment in evaluating whether the benefits of the controls and procedures that we adopt outweigh their costs.

As required by Rule 13a-15(b) under the Exchange Act, an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of July 31, 2014 was conducted under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of July 31, 2014.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the fiscal quarter ended July 31, 2014 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are not a party to any pending material legal proceedings. However, because of the nature of our business, we may be subject at any particular time to lawsuits or other claims arising in the ordinary course of our business, and we expect that this will continue to be the case in the future.

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ITEM 1A. RISK FACTORS

You should carefully consider the risks and uncertainties described in our Annual Report on Form 10-K for the fiscal year ended January 31, 2014, filed with the SEC on March 26, 2014 and other documents we file with the SEC. The risks and uncertainties described are those that we have identified as material, but are not the only risks and uncertainties facing us. Our business is also subject to general risks and uncertainties that affect many other companies, such as overall U.S. and non-U.S. economic and industry conditions including a global economic slowdown, geopolitical events, changes in laws or accounting rules, fluctuations in interest and exchange rates, terrorism, international conflicts, major health concerns, natural disasters or other disruptions of expected economic and business conditions. Additional risks and uncertainties not currently known to us or that we currently believe are immaterial also may impair our business operations and liquidity.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(b) Use of Proceeds

On July 3, 2012, we completed the initial public offering of our common stock pursuant to our Registration Statement on Form S-1 (File No. 333-176019), which was declared effective by the Securities and Exchange Commission on June 27, 2012. The underwriters for the offering were Stifel Nicolaus & Company, Incorporated, Robert W. Baird & Co. Incorporated, Canaccord Genuity Inc. and Needham & Company, LLC. We did not utilize any of the net proceeds of this offering in our business during the three months ended July 31, 2014.

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ITEM 6. EXHIBITS

Exhibit Number	Description
3.1	Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, event date June 27, 2012, filed on July 3, 2012).
3.2	Amended and Restated By-laws (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K, event date June 27, 2012, filed on July 3, 2012).
3.3	Amendment to Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.3 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 2013)
10.1	Letter Agreement dated June 4, 2014 between Exa Corporation and Rick Gilbody (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, event date June 4, 2014, filed on June 6, 2014).
10.2	Exa Corporation Amended and Restated 2011 Stock Incentive Plan (incorporated by reference to Appendix A to the Company’s Proxy Statement filed on Schedule 14A on May 2, 2014.
31.1*	Rule 13a-14(a)/15d-14(a) Certification, executed by Stephen A. Remondi, President and Chief Executive Officer of Exa Corporation.
31.2*	Rule 13a-14(a)/15d-14(a) Certification, executed by Richard F. Gilbody, Chief Financial Officer of Exa Corporation.
32.1**	Section 1350 Certification, executed by Stephen A. Remondi, President and Chief Executive Officer of Exa Corporation.
32.2**	Section 1350 Certification, executed by Richard F. Gilbody, Chief Financial Officer of Exa Corporation.
101***	Interactive Data Files pursuant to Rule 405 of Regulation S-T (XBRL)

* Filed herewith.

** Furnished herewith.

*** Pursuant to Rule 406T of SEC Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, and is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.

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EXA CORPORATION

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EXA CORPORATION (Registrant)
By:	/s/ Richard F. Gilbody
	Richard F. Gilbody
	Chief Financial Officer
	Date: August 27, 2014

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